June 28 (Bloomberg) -- The Democratic chairman and top
Republican on the Senate Finance Committee are putting pressure
on their colleagues and lobbyists, asking senators to justify
every break in the U.S. tax code or risk its elimination.

The “blank slate” approach unveiled yesterday by Senators
Max Baucus and Orrin Hatch marks the bipartisan pair’s biggest
step yet toward a revision of tax policy even as they defer a
central question: whether to raise more revenue.

“They’re trying to smoke people out and not let them have
it both ways,” said Jonathan Traub, a managing principal at
Deloitte Tax LLP in Washington. “It does put the onus on the
business community and those who want to save their
expenditures.”

Starting from zero makes the tradeoffs inherent in a tax
rewrite more explicit, because every break that’s added would
mean higher tax rates. Every $2 trillion over 10 years in
individual tax breaks would cause rates to rise between 1.3 and
2.2 percentage points and every $200 billion in corporate tax
breaks means a 1.5 percentage-point increase.

The Baucus-Hatch letter, which asks senators to submit
comments by July 26, started a lobbying frenzy. Backers of tax
breaks for retirement savings, charitable contributions and
credit unions yesterday immediately outlined the importance of
keeping those provisions.

The interest groups and corporations may never know which
senators support them. The finance panel won’t release senators’
submissions.

‘Justify’ Breaks

“We’ve seen how hard it is once you use the existing tax
code, to sort of give it a haircut, and everybody’s got a
constituency fighting for what they’ve got,” said John Cornyn
of Texas, the second-ranking Republican in the Senate. This way,
“they’ve got to justify adding it back in and its influence on
raising the marginal rate.”

Baucus, a Montana Democrat, and Hatch, a Utah Republican,
set no deadline for committee action other than declaring their
effort in the “home stretch” and saying they wanted a tax law
by the end of this Congress, which is Jan. 3, 2015.

“It is time to simplify this doggone mess,” Hatch said on
the Senate floor yesterday during a joint appearance with
Baucus. “We can do it, but it is going to take a bipartisan
effort.”

The fate of the Baucus-Hatch effort will be linked to the
broader debate -- which isn’t resolved -- over whether the tax
code should raise more revenue.

Deficit Reduction

Democrats insist that some of the revenue raised from
curtailing breaks should go toward deficit reduction.
Republicans resist that approach and say spending cuts alone --
particularly for entitlement programs -- should be used for
deficit reduction.

“If Republicans are actually serious about wanting to do
tax reform, then they need to give up their allergy to tax
revenue,” said Michael Linden, managing director of economic
policy at the Center for American Progress, a Washington group
founded by former aides to President Bill Clinton.

Baucus and Hatch are moving ahead without an agreement on
the revenue issue in an attempt to figure out the best policies
and then engineer tax rates to meet that goal.

“The architecture of the bill doesn’t look all that
different” with or without an agreement on revenue, said Traub.
He was staff director for the House Ways and Means Committee
under Representative Dave Camp, a Michigan Republican.

Even under the blank slate, some tax breaks for low-income
households would remain, such as the earned income tax credit.
Otherwise, the proposal would shift the tax burden away from
higher-income households.

Veterans’ Benefits

Linden said the blank slate approach isn’t workable, in
part because lawmakers will have to spend time justifying breaks
that almost everyone supports, such as the exclusion of
veterans’ disability benefits.

“I understand the seeming elegance of it, but it’s not
really practical,” he said. “If they thought something really
serious was going to happen, you might expect to see a
discussion draft that was a little more fleshed out than this.”

The instant focus on which breaks should remain obscures
the fact that many of the most difficult decisions lawmakers
will face have nothing to do with the rates-for-breaks trade.

Nonprofit Groups

For example, a tax code rewrite might address the rules
governing political activity of nonprofit groups that have been
at the center of the controversy surrounding the Internal
Revenue Service.

Lawmakers must decide how to manage the transition between
the current tax system and a revised one. That’s particularly
difficult in areas of the tax code where breaks affect long-range investments, such as the depreciation of capital equipment
and the exclusion of interest on municipal bonds.

Congress is also considering changes to the taxation of the
foreign income of U.S.-based multinational corporations and
companies that pay their taxes through their owners’ individual
returns.

Baucus and Hatch wrote the letter after committee members
spent several months in a series of closed-door meetings,
reviewing different parts of the tax code.

“The fact that Baucus and Hatch are working together on
this and want to try to get as much committee involvement as
possible can only be a good thing, can only move the process
forward,” said Arshi Siddiqui, a tax lobbyist at Akin Gump
Strauss Hauer & Feld LLP and a former tax aide to House
Democratic Leader Nancy Pelosi.

In the House, Camp has said his panel will approve a bill
revising the tax code this year. He called yesterday’s
announcement a “significant step forward.”

Camp and Baucus have been working together, too. They’ve
set up a joint Twitter account and a website to invite comments,
and announced that they will hold a series of events across the
country in the next few months.